Definition of Benefits, Rights and Features.

[Guest Ofraser]

Here's a question that has me chasing my tail just a bit. Any help would be appreciated.

A sponsor establishes a safe harbor 401k plan. The investments are participant directed. The investment provider for the plan uses front-end loaded mutual funds with a 5.7% load. If an individual participant agrees to make a minimum contribution to the plan the load is reduced to 4.7%.

The only participant who can reasonably make contribtutions at the required level is the owner of the company. The owner is the only HCE.

The load reduction is not a written provision of the plan and is provided soley by the investment provider.

Question: Is this load reduction a "benefit, right or feature" of the plan which is subject to the effective availability test?

[MWeddell]

I believe this would be a benefit, right, or feature subject to discrimination testing.

A benefit, right, or feature includes an "other right or feature." "The term other right or feature generally means any right or feature applicable to employees under the plan. Different rights or features exist if a right or feature is not available on substantially the same terms as another right or feature." Treas. Reg. 1.401(a)(4)-4(e)(3)(i). An example of an other right or feature is "The right to a particular form of investment, including, for example, a particular class or type of employer securities (taking into account, in determining whether different forms of investment exist, any differences in conversion, dividend, voting, liquidation preference, or other rights conferred under the security)." Treag. Reg. 1.401(a)(4)-4(e)(3)(iii)©. Nothing in the regulations distinguishes between provisions established by the plan document and those established by the investment vehicle used for funding the plan. Therefore, I believe that this feature is subject to BRF testing (and as you point out likely to be discriminatory if that testing is required).

There have been many threads that have explored this issue in the context of establishing minimum account balances for self-directed accounts. I think those threads address a situation that is analogous to your situation. Not all of the posters agreed with my views, so it's certainly worth perusing to get a broader variety of opinions:

http://www.benefitslink.com/boards/index.php?showtopic=14662

http://www.benefitslink.com/boards/index.php?showtopic=15726

http://www.benefitslink.com/boards/index.php?showtopic=8869

http://www.benefitslink.com/boards/index.php?showtopic=7700

http://www.benefitslink.com/boards/index.php?showtopic=13078

http://www.benefitslink.com/boards/index.php?showtopic=9575

http://www.benefitslink.com/boards/index.php?showtopic=15306

[austin3515]

Off the subject, but is a 5.7% load a good option for what is most likely a short-term duration of investment? How long do most employees stay in a 401(k) Plan? It's tough to justify 5.7% up front investment expense when you pull all your money out in 3 years, isn't it?

[MWeddell]

Good point. In my experience, any loads are typically waived for 401(k) plans. However, I don't often work with very small plans so I let that slide by the first time without comment.

[mbozek]

The BRF rules only apply to a provision of the plan. The cost/ fee structure of the fund is not a provision of the plan since the fees are set by the fund which is not part of the plan. This provision is no different from a requirement of a broker for a minimum amount in order to open a directed brokerage account under a qualified plan. These provisions are filed with/approved by the appropriate regulatory authority which has jurisdiction over the securities laws. Since the minimum is not set in the plan terms it is not a BRF. My own view is that 5.7% is an extremely high load charge for any fund and there must be alternate funds with lower fees with the same risk/ reward profile.

[KJohnson]

MJB--I realize the IRS has given informal comments that support your definition of a BRF, but I am not sure that it squares with the actual language of the regulation cited by MWeddell which use the terms "applicable" and "available" and does not use terms like "specified" by the Plan or under a "provision" of a Plan. It is very rare that a particluar investment is specified in the terms of the plan document itself. They are often not even specified in the terms of the SPD.

The reg is also specific that the "right to a particular form of investment" is a right or feature and different rights or features exist if they are not "available on substantially the same terms."

Therefore, it would seem that to the extent that you have an investment alternative that is available on different terms to different participants you have a BRF issue.

To take an extreme example, let's say that you have a Plan that offers 6 mutal funds and a directed brokerage feature. To use the directed brokerage feature, the Plan requires that participants use a specified broker. That broker has a minimum of $1,000,000. I would think that you would have a BRF problem in this instance no matter what the informal guidance given at an ASPA conference ( My recollection is that this guidance may also have varied from year to year.)

[david rigby]

This Q&A is from the 1999 Gray Book:

QUESTION #19

Nondiscrimination: Nondiscriminatory Benefits, Rights and Features

An employer has a profit sharing plan with individually directed accounts at a major mutual fund house. The participants are all being given the option of electing to use an investment manager for their accounts if they so desire. The management fees would be paid directly from the participant's account.

Only the HCEs have account balances at the minimum amount necessary, as established by the investment manager, to be serviced by the manager. There is a concern that the use of investment managers by the HCEs would violate the benefits, rights and features requirements of the non-discrimination rules. Is this an issue?

RESPONSE

Yes, there is an issue. If the option of using individually directed accounts is only effectively available to HCEs, the plan is in violation of the nondiscriminatory benefits, rights and features requirement.

[mbozek]

I am not aware of the precendial authority of the Gray Book. Also a plan can go in and out of effective availablility for plan years if Non HCEs attain the minimum account balance due to investment return rates or the account balance of certain HCEs is not sufficient for the option. However, under the BRF regs cited above, a different right or feature exists if the right or feature is not available on substantially the same terms. The issue then is whether allowing an investment option to be offerred at two different loads rates which are less than 20% different is subsantially the same terms. Without any further guidance from the IRS there is no authority that the options are not available on substantially the same terms.

Also be careful what you wish for, because many funds are issued with different cost structures such as A, B and C shares, 12-b1 fees and other distinctions in charges which if deemed to be a violation of the BRF rules could require termination of purdent investment options in violation of the fiduciary rules. Who would police the differences and review the investment materials? As long as the plan does not incorporate investment option terms as part of the plan but merely make the options available as an investment option the plan sponsor has substantial authority for concluding that the charges/minimum amounts under which the option is offerred is not a BRF under the plan. If the IRS wants to clarify the matter at a future date then the Plan admin can conform to such IRS ruling. Eg. Rev rul 96-47 defines substantial detriment to a voluntary distribution in excess of $5,000 under Regs.1-411(a)(11)-1.